If the big three of Indian e-tailing have the urge to splurge, it’s because they are flush with fundingRajiv Singh | ET Bureau | September 25, 2017, 08:59 IST

(Thinkstock Images)It’s been a windfall for online shoppers as they pocketed discounts as high as 90% in the fourday shopping festival that ends today. There’s, of course, a price to pay for — or, rather, a cost to be incurred by — those offering the goodies: the etailers. Led by Flipkart, Amazon and Paytm, the ecommerce bandwagon is likely to burn over Rs 2,660 crore this festive season, says a latest report by RedSeer Consulting.

If the big three of Indian etailing have the urge to splurge, it’s because they are flush with funding. In May, Paytm raised $1.4 billion (over Rs 9,000 crore) from Japanese investor SoftBank. Three months later, it was the turn of India’s largest ecommerce player Flipkart to bag $2.5 billion (Rs 16,200 crore) from Soft Bank’s $100 billion Vision Fund. And, early this year, American ecommerce giant Amazon pumped in another Rs 1,680 crore in its India operations.

Clearly, for the well-funded big boys of ecommerce, profits can wait. Discounts and cashbacks — which began earlier this week — can’t. Losses, well, they are just a number, however large they seem. Have a look: Amazon India’s loss soared to Rs 3,572 crore in the year ended March 2016; Flipkart reportedly lost Rs 2,850 crore during the same period; and Paytm was in the red to the tune of Rs 1,549 crore. The total: a cool Rs 7,971 crore.

Now here’s a sampling of what’s on offer ahead of the festive season. Paytm Mall, the ecommerce arm of Alibaba-backed Paytm, is doling out Rs 501 crore worth of cashbacks during the four-day Cashback Sale, informs Amit Sinha, COO of Paytm Mall. While 25 phone buyers will get 100% cashback every day, 200 customers will receive Paytm Gold, which enables them to buy or sell gold using Paytm, every day.

Cashback, reckons Sinha, is a great way of saving money and getting more value out of a purchase. Unlike other platforms, Paytm’s customers can use cashbacks at millions of merchant outlets across India. These brand and merchant-funded offers help in driving repeat usage and attracting new customers, he adds.

Others, too, are having a blast. Amazon claims to have seen a 14x growth during the first day of the Great Indian Festival on Thursday, and 2.5x growth over the same period last year. ShopClues says it has seen an over 19% jump in user traffic in its ongoing sale compared with a year ago.

Investors wouldn’t be losing sleep, seeing their funds being utilised to lure consumers. The structure of the venture capital industry, explains Sustain Labs Paris CEO Miniya Chatterji, a sustainability incubator, is such that VCs need to invest big sums in a handful of startups to have a chance at making significant returns. So the startup beneficiaries are in no hurry to think of the bottom line. However, just pumping in cash will not make winners of the big three.

Overspending, says Chatterji, is not merely about spending too much money but spending on the wrong strategies or in the wrong way. For example, Dropbox had prominent venture capital backers when they started. But their early paid search campaign saw customer acquisition costs of $233-388 while their product was only for $99.

They quickly realised that spending on marketing would not work, and turned to investing that money in developing the product. “The measure of success is not the input in the form of funding but output in the form of profit,” adds Chatterji.

Founders’ OpiumK Vaitheeswaran, cofounder of Fabmart.com, sounds the warning bell for cashguzzling online ventures. Unbridled funding is like a drug and once founders get addicted to continuous funding at high valuations, they can’t get off it. In startup circles, this drug is referred to as Other People’s Money (OPM), which sounds like opium for a good reason, says Vaitheeswaran. Once the unicorn entrepreneurs get on this funding gravy train, it is hard to jump off. In a sense, it is like having a tiger by the tail. You cannot hold on and you cannot let go.

Vaitheeswaran contends that neither investors nor entrepreneurs understand an important principle: a discount-hungry customer who shops online is not a customer in reality. “She is a temporary transactor who is also smartly disloyal; if someone else offers her a better deal, she will shift,” he says. And when this someone is Amazon — a stronger brand with superior technology, lower prices and delivering an outstanding customer experience — it becomes a mug’s game. “The only way is down.”

The insane cash burn makes a mockery of the attempts of fellow ecommerce players — mostly tier-2 players — sweating it out to show profit. If a funded, loss-making company enters your industry, it will train your customers to expect discounts. Thereafter your business model will also need to embrace cash burn, says Jessie Paul, marketing expert. The upshot: if you can’t beat them, you have to join them. But that, again, may be a road to nowhere, what with the tier-2 players being unable to attract more funding.

Early this week, the Aditya Birla Group’s flagship ecommerce site Abof.com decided to shut operations by year-end, as it couldn’t take on the heavy discounting model of deeper funded rivals. “Looking at how ecommerce businesses continue to struggle and are unlikely to make money for some time, it did not seem logical to continue as if everything is all right in the sector,” Santrupt Misra, human resources director, Aditya Birla Group, told ET early this week.

Paul predicts the mad game of cash burn will continue for some time — as long as funds are available. The rest of the ecommerce brigade is only talking frugality because they are cash-strapped, reckons Paul, and not because of any fundamental change in business model. Quality and uniqueness of the product, she says, also have a part to play in cash burn.

If the product addresses a pressing consumer need, then one doesn’t need to discount so much. “Sadly, not many Indian loss-making businesses can claim to have a differentiator,” she adds.

Away from the sea of red, if there’s one stakeholder who isn’t complaining, it’s the discount-happy, cashback-crazy, deal-struck consumer.